Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds w
ID: 2729223 • Letter: P
Question
Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 7.5 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $65 a share and has face value of $100. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 38 percent. What is the firm's weighted average cost of capital?
10.15 percent
10.64 percent
11.18 percent
11.30 percent
11.56 percent
10.15 percent
10.64 percent
11.18 percent
11.30 percent
11.56 percent
Explanation / Answer
Answer: a. 10.15%
Re= 0.028 + 1.34 (0.112 - 0.028) = 0.14056
Rp= (0.07×$100)/$65 = 0.10769
Rd=7.5%
Capital structure Market value Weight Cost of capital WACC Equity 105000000 0.4492 14.06% 6.31% Preference shares 48750000 0.20856 10.77% 2.25% Debt 80000000 0.34225 4.65% 1.59% Total 233750000 10.15%